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Transaction Reconciliation

What is Transaction Reconciliation?

Transaction reconciliation is the process performed by accountants to verify individual entries in a ledger or statement.

The team compares these journal entries to the original records of the transactions to reaffirm that the ledger entries are correct.

In a business, transactions are not limited to sales of goods and services. Any exchange of a resource that has some sort of monetary value is considered a transaction.

All transactions must be entered into the accounting records for the business, and those entries must be verified on a regular basis to ensure they have been properly and accurately entered into the appropriate ledger.

This is done before the accounting period is closed and the information from those ledgers is used to produce financial statements about the business.

All transactions have some sort of corresponding record or source document. For example, employee expenses have receipts, purchase orders have invoices, and bank transactions have bank statements. All of these transactions will have been entered into a corresponding account ledger.

At the close of the accounting period, the accounting team will reconcile the individual transactions in these ledgers by comparing their entry with the source document.

Transaction reconciliation is performed on all manner of financial activity. It is an important process in business accounting to ensure the accuracy of financial records. It can help identify errors and fraud and it helps business comply with regulatory requirements and perform proper tax filings.

What Are the Different Types of Transaction Reconciliation?

There are many types of transaction reconciliation including:

  • Bank reconciliation is the process of reconciling bank transactions such as deposits, withdrawals, checks, automatic payments, and electronic debits. The business will reconcile its own transaction records with the statements it receives from the bank.

  • A vendor reconciliation compares transaction records provided by a vendor or supplier with the business’s own accounts payable ledger.

  • Intercompany reconciliation is the process of reconciling statements and transactions between units, divisions, or subsidiaries of the same parent company.

  • Business specific reconciliation involves the reconciliation of transactions in a specific business unit, such as a stock inventory or expenses reconciliation.

  • Petty cash reconciliation is the process of verifying that all transactions in the petty cash fund are correct.

  • Credit card reconciliation compares purchase receipts with credit card statements provided by the card company.

How is Transaction Reconciliation Performed?

Reconciliation can be performed in one of two ways:

  1. A business can perform transaction reconciliations by reviewing documents. This is done by examining transactions in the business’s own financial records and comparing those with source documents, such as receipts, invoices, or statements.

  • A business can also perform transaction reconciliation by doing an analytics review. This is done by performing a historical analysis and comparing this to current data. If present transaction entries are widely different from projections made from historical data, this may be a sign of irregularities.

FAQ

Why Is Transaction Reconciliation Performed?

Transaction reconciliation performs a number of vital functions in business accounting, including but not limited to:

  • Catching errors in data entry

  • Correcting timing discrepancies with bank transaction, fees, and interest

  • Ensuring the accuracy and validity of financial statements produced by the business

  • Detecting fraud

  • Complying with financial regulations

  • Preparing properly for tax filings

What Are the Basic Steps of Transaction Reconciliation?

Transaction reconciliation follows several basic steps. These steps are applied universally for all types of transaction reconciliation:

The first phase of transaction reconciliation is to gather and prepare the necessary documentation. This entails identifying the appropriate account(s) to be reconciled and the time period for which the reconciliation will apply. Ledgers with debits and credits for the account in the period of review will provide the transaction details to be reconciled.

Once all the documentation is prepared, the accounting team will analyze the data. This will involve reviewing all debits and credits, substantiating them against outside documentation, and making all necessary adjustments. Opening and ending balances will also be verified.

The final stage includes retention of all documents. A controller or accounting manager will review the analysis. This analysis confirms the details of the reconciliation to make sure that all balances are in agreement, supporting documents are provided to verify the transactions, and all adjustments were appropriately made.

How Often Should Transaction Reconciliations Be Performed?

Transaction reconciliation is typically performed before the close of an accounting period. This is often done on a monthly basis, as well as quarterly and annually.

How often reconciliation is performed can vary depending on a number of factors. A large business with frequent transactions and a complex structure of accounts may perform reconciliation more often than a smaller business or one that does not have the same frequency of transactions.

The more often transactions are reconciled, the more accurate the information will be and the more informed management will be. Businesses that have adopted the virtual close are able to reconcile transactions almost instantaneously and can provide real-time data about the business and its finances to managers.

What Happens When Transaction Reconciliation Finds Errors?

It is the point of transaction reconciliation to find errors and discrepancies. When they are found, the information must be corrected. This is referred to as a correcting journal entry.

Accurate and Effective Account Reconciliation Process

Request a demo with us and see how you can standardize, control, and streamline account reconciliations. Accountants can quickly compare general ledger, bank, and other data, investigate discrepancies, attach supporting documentation, and take required actions from an intuitive, unified workspace.